In this Compliance Clip (video), Adam provides a simple explanation of money laundering. As BSA and AML rules can often be difficult to explain, this video provides a quick overview of money laundering in simple and easy to understand language.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to discuss what is money laundering. Money laundering is something that relates back to the Bank Secrecy Act. In fact, this is an exact topic, and these are slides that come right out of our BSA Bootcamp, which is a great foundational BSA training program. So stick around to the end and we'll discuss that in just a minute.
Now, what is money laundering? I just want to talk about what money laundering is. Money laundering is really the act of taking dirty money and conducting transactions in a way that prevent red flags, essentially cleaning the money, so that it appears to be legitimate and avoids suspicion by the financial institution and by law enforcement and other authorities. That's the process, you're essentially taking dirty money, somehow cleaning it or laundering it, and then making it have the appearance that it is in fact clean. So that's the process.
The best example I have for this is an example of maybe a privately-owned ATM. So we have a privately-owned ATM, and we have a drug dealer, Bob, right? Every drug dealer is named Bob, right? Bob the Tomato. I don't know, whatever. Bob is our drug dealer and he actually sells some illegal stuff, whatever he decides to sell, but he also has some legitimate businesses. And his legitimate businesses are a convenience store. So he operates a convenience store and he also has an ATM inside that convenience store that he uses to create other revenue, and also launder his money as you'll see in this example. What essentially happens is Bob has his dealers come in, they bring him cash from the stuff that they sold. They bring it to Bob in his back room. He takes his money, puts it into his vault. You kind of have to imagine this backroom of a convenience store. You know, the secret room that has the glass, that you could only see one way through and you can't ever see in there, but Bob's back there. He takes money, puts it into his vault, pulls out a bag of whatever, and gives it to his dealer. Right? Next dealer comes in, gives him the money. He takes it. He puts it in his vault, gives them a bag of whatever they go on to sell more stuff.
Well, Bob, at some point is going to have so much money, he doesn't know what to do with it. So one thing he does is he takes his privately-owned ATM, takes the stacks of twenties that are dirty money because they came from illicit or illegal proceeds, just a few minutes ago, takes those twenties, puts them in the ATM. Now, as I'm driving by, I see out in his parking lot, somebody selling smoked chicken right on this smoker and it looks amazing. And I'm basically drawn in like a bug in the light because of the smell of the smoked chicken. Some of you have experienced this. I know you have. So I pull over, I go to buy it, but I realize it's way overpriced and I don't have enough money in my wallet. So I go into the convenience store because there's a sign that says ATM, take out my debit card, pull some money out. At that point, I'm pulling out money that, 15 minutes ago, these $20 bills, were illegal money that had come in from drug sales. Now, when I have it in my hand, by taking it out of the ATM, this money is now essentially clean or has the appearance of being clean. And it is clean for me because it came through a payroll system, right? It was through payroll. That money was legitimately coming out of my account. And that's one way that the money can essentially be laundered. Does that make sense?
To explain this another way, what the regulators do is they talk about having three different steps for money laundering. The first step is called a placement. So what happens in the placement phase in money laundering is this is where the “elicit actor”, that's what they call them, but they're talking about illicit actors and the illicit actors introduce funds in one of three ways. They either commingle funds with legitimate funds. They structure the funds, which means that they structure their transaction in a way to avoid suspicion. So instead of bringing in $30,000 in cash in one day they'll spread it out over the course of a month and bring that cash in smaller deposits, or they'll maybe do it in increments of $9,000, which is an obvious form of structuring, trying to place the money in. Or they're also spread it out geographically. If there's multiple branches in your organization, they may be taking it to a branch in Columbus, in Cleveland, in Akron and spreading it out through the state of Ohio by placing it that way. That's the first step, placement.
The second step to money laundering is called layering. This is where they're essentially trying to launder it to make it have the appearance of clean. In this process, they're moving funds around the financial system. They often have complex transactions and some examples here are purchasing smaller dollar monetary instruments, or doing multiple transfers or even having wire transfers. They're trying to move it around so that it is confusing, and it's going through this laundry process.
The final step then of money laundering of course, is integration. This ultimately creates an appearance of legal funds that could include the purchase of real estate or other assets or some different things - purchase of a monetary instrument, a loan where they essentially have a deposit secured loan where the cash is still in the bank, but then the loan goes out and the loan money is used elsewhere. So there's lots of different ways, but it's essentially those three steps, placement, layering, and integration.
That is money laundering 101. I hope you enjoyed this Compliance Clip. Like I said, this was actually part of our BSA Bootcamp. This was one of the many topics that we discussed in that three and a half hour program. So if you're looking for some foundational training on the Bank Secrecy Act, take a look at our store compliancecohort.com/store. Look for the BSA Bootcamp and you can see exactly what's covered there. Thanks for watching this video clip. I hope you enjoyed it.